Coronavirus update: What are the next steps?

Coronavirus, known as Covid-19, has disrupted business and supply chain operations as it has spread around the world. In, China, where the virus first emerged, travel bans and a shortage of government-mandated facemasks prevented staff from working in their offices or meeting suppliers while logistics networks in one of the world’s key manufacturing hubs slowed to a crawl.

As the disease has spread further, functions are continuing to assess and mitigate the impact of the outbreak on their internal and external operations while considering the long-term implications for functional risk management processes.

To build a more informed picture of what is happening on the ground, where the impacts are being felt and how functions are looking to mitigate disruption, Procurement Leaders has been speaking with a variety of CPOs, as well as staff leading Covid-19 response efforts to discuss the issues at hand.

Overview of the impact of Covid-19

IMPACT AREAS

SHORT-TERM

LONG-TERM

Internal: managing business

Travel suspensions in China; restrictions globally.

Staff working from home in affected areas.

Amended project timelines and 2020 strategies.

Adjusting targets.

External: managing supply

Dramatically reduced output from Chinese suppliers.

Logistics availability throughout Asia markedly reduced.

Broader economic repercussions: recessions and slow-downs.

Greater risk of supplier insolvency.

Current challenges

Quarantine measures are disrupting the movement of goods

THE SITUATION

In February, one China-based CPO in the telecommunications industry said quarantine measures were in full effect. The streets, he explained, were mostly empty and the government has erected strict internal borders. This, he said, was clogging up logistics networks and making the movement of goods in, around and out of China difficult for procurement functions.

One function head in the food and beverage sector noted the movement of goods between two cities in China, which usually takes a day, was taking five to six days because of these borders and checkpoints.

At the time, many procurement organisations, especially those in the manufacturing sector, said they were looking at other countries for alternative suppliers and substitute products. But they noted that the market was highly competitive given the fact that numerous functions were pursuing this strategy.

At the end of February and into early March as infection rates in China fell, workers began returning to work in low-risk areas. They were being encouraged to do so by company incentives as well as transport laid on by the government.

Many procurement functions are hoping that the easing of restrictions will allow them to get their people to supplier sites to see what the situation is on the ground so they can better assess the longer-term impact this will have on their operations.

WHAT THE COMMUNITY IS SAYING

"Quarantine is in full effect in major cities across China. Even when people are coming back to their home towns after being away for Chinese New Year, they are having to go through further 14-day quarantines. The impact has been tremendous,"Coronavirus response lead, consumer healthcare industry

"The real issue is logistics. Public transport is locked down [in China] and some internal borders have been set up, which are making moving goods around extremely difficult,"CPO, telecommunications industry,

“We have some suppliers close to Wuhan and we are keeping in close contact with them, but getting a sense of what is happening on the ground has been difficult. Where some suppliers haven’t been as responsive, particularly in Europe, we are just constantly harassing them by phone,”

Category manager, pharmaceutical industry:

NEXT STEPS: COMMUNICATION IS KEY

Maintain contact with logistics providers to ensure you know how and where your business will be affected. Talk daily with suppliers in affected areas and where possible, look for alternative sources of supply outside of China as well as potential substitutes.

Challenges sourcing facemasks

THE SITUATION

In China, businesses are required to have facemasks for their staff before they are allowed to reopen, but it was initially very difficult to source these masks because of the demand. There were also some reports of the government seizing shipments as they entered the country and sending them up to affected regions.

To try and get around this, functions were sending them into the country in smaller batches of around 10,000 units and were also trying to source them from countries outside of China.

With factories opening back up, the supply of facemasks will be crucial over the coming weeks. If the virus continues to spread, there could be a further uptick in demand, which will prove challenging.

WHAT THE COMMUNITY IS SAYING

"When we can get orders of facemasks into the country, some of those orders are being retained by the government so we are looking at splitting orders to keep them below minimums," Head of supply chain procurement, APAC, healthcare industry

NEXT STEPS: ENSURE RESOURCING IS CORRECT

CPOs should ensure crisis teams have additional procurement resource to ensure the business can source and supply facemasks to staff in affected regions. Continue to divide facemask consignments to smaller units to reduce the likelihood of them being seized.

Travel has been largely suspended

THE SITUATION

Travel to and from China has been banned by the vast majority of organisations. Face-to-face meetings have been suspended as have trade shows and conferences. Suppliers have been instructed not to travel to sites and this has been replaced with virtual meetings.

While official government guidelines are that people can still travel to the majority of destinations across the globe, there is some evidence within the procurement community of wide-ranging travel bans put in place by organisations. Again, this is being replaced with video conferencing.

WHAT THE COMMUNITY IS SAYING

"Face-to-face meetings have all been suspended and so have trade shows,"CPO, telecommunications industry

NEXT STEPS: CONTINUE BANS

Flight bans are still very much in place in regards to China but, as the number of infections eases off, procurement operations in regional hubs such as Singapore, Hong Kong and Shanghai are likely to have some freedom to visit suppliers. Video conferencing is likely to remain a key part of a functions communication strategy with suppliers before flights resume in the months to come.

Working from home policies widely deployed

THE SITUATION

At the start of the outbreak, teams based in China and Hong Kong were advised to work from home. While some businesses encountered issues in terms of providing their staff with laptops, phones and the right connectivity, this has been a largely effective policy with work continuing.

Some organisations, especially those sourcing professional services out of China, adopted self-quarantine measures for their teams in the country.

With the government encouraging people back to their offices, blanket working from home policies are likely to be shelved over the coming weeks.

WHAT THE COMMUNITY IS SAYING

"We buy professional services from China and have imposed self-quarantine measures on our operations over there," Head of supply chain, financial services industry

NEXT STEPS: GET THE RIGHT EQUIPMENT

While infection rates may be easing in China, there is still a risk that there could be a rise elsewhere. Ensuring staff have the equipment they need to work from home is essential to ensure business continuity. Staff should take laptops and any other equipment they may need home with them every day just in case a further outbreak should strike.

Supply chain assessments

THE SITUATION

Functions from financial services to healthcare have assessed their supply chains. Some of this work had been completed before the outbreak and that information has proved invaluable.

In most cases, it has allowed functions to quickly locate at-risk suppliers and draw up mitigation plans.

The next step around assessments has to be getting staff on the ground at supplier sites to assess the situation for themselves. This will only happen once travel restrictions have been eased and it is safe to do so. Suppliers in ’at risk’ locations will continue to be communicated with from afar.

WHAT THE COMMUNITY IS SAYING

"We have been searching for alternative suppliers in other countries but everyone is doing that. We have enough stock to keep running for around six months but, beyond that, things will come to standstill," Group purchasing director, manufacturing industry

NEXT STEPS: GO DEEPER IN THE SUPPLY CHAIN

Functions should begin exploring the deeper tiers of their supply chains, where they have the capacity for further investigation, and run assessments specifically on Tier-2 and Tier-3 exposure.

A double-dip risk

THE SITUATION

There are concerns that the next couple of months could bring further supply disruption through what has been described as a “double-dip”.

In preparation for Chinese New Year, businesses increase stockpiles to ensure they can keep their operations running while factories close for the holiday. This is the normal dip and quickly eases as people return to work. However, there are fears of a second dip due to the limited flow of raw materials into China over the last few months.

Factories are believed to have only limited raw materials stocks, which will further slow down output once all existing goods are shipped and the supplies have been exhausted.

WHAT THE COMMUNITY IS SAYING

“Chinese New Year had already seen a halt to production and we had stockpiled in advance of that. While we have some parts arriving by ship, there are no more than five containers on it, which is a concern if the flow of goods doesn’t start back up,” Procurement chief, heavy goods industry

NEXT STEPS: WORK CLOSELY WITH SUPPLIERS

Functions need to get on the ground before they will know what the full extent of the risk is. Staying in close communication and offering suppliers support to work through any problems is key to mitigating the threat. But, so too will looking for other potential sources of supply.

Long-term measures

Black swan events such as this are impossible to predict. The effect on the supply chain is almost entirely unpredictable. CPOs should learn from this and, in their risk management endeavours, look to build resilient supply chains – not focus on risk identification. In the long term, procurement leaders should look to:

Ensure buy-in for future risk management capability

Securing budget for risk management tools or capabilities is easiest in the immediate aftermath of a major disruption. Where the organisation has identified deficiencies in its response, procurement chiefs can use these as a burning platform to build a business case for enhancing maturity. In quieter times, the organisation’s appetite to invest in risk mitigation is weak.

Risk planning

Businesses will adapt their strategies will to mitigate the risk of such events as much as possible. There will be more mixed loads of goods shipped, annual drills to test whether risk management plans still work and remain relevant.

Supplier financial risk

With businesses having to use home-working practices, spend money on facemasks and even shut down, there are concerns in the community about their financial health. This concern will be especially acute if companies are forced to shut down should any instances of Covid-19 be subsequently found. The financial health of suppliers needs to be carefully monitored moving forward.

Build in the digital capabilities of the procurement process

Many organisations are reporting breakthroughs in the e-procurement processes, as staff are forced to work remotely, without the advantage of face-to-face meetings with suppliers. As such, staff in China-based companies are adopting technologies more readily.

Advocate for procurement’s central role in future risk management and disaster response

The function has played a pivotal role in securing operations with the supplies it needs in demanding times. Ensure future disaster response plans place supplier managers in the centre, such that the organisation can better protect itself from the potential negative effects of future disruptions.

ONGOING SUPPORT

Procurement Leaders has a variety of resources to help members strengthen their risk mitigation techniques and promote proactive practices. Members have been connecting on virtual roundtables to share their approaches as the virus and its disruption develops.